Categories

Archive

Why Not “Occupy” Public Sector Pension Funds?

A CIV FI post back in January 2010 entitled “Axis of Wall Street & Public Sector Unions” identified an irony still lost on the occupy movement’s rank and file – Wall Street is financed by the pension funds of unionized government workers. Every year, taxpayer funded government agencies pour hundreds of billions of dollars into Wall Street investment funds.

Here’s a summary of the dynamics between Wall Street, unionized government workers, and the taxpayer:

(1) The government workers provide services vital to the taxpayer, and charge the taxpayer, on average, about 40% of their income (middle class worker, all taxes – state, federal, social security, medicare, property, sales) to receive these services.

(2) The government workers receive, in addition to their normal pay, funded by these taxes, pensions that are, on average, five times better than what taxpayers get from social security (the average government pension is $60K per year with an average retirement age of 55, the average social security benefit is $15K per year with an average retirement age of 65).

(3) The government workers tell the taxpayers – don’t worry – you don’t have to pay additional taxes for us to get these generous pensions, because we’ll invest the money on Wall Street, and Wall Street will earn 7.75% per year on these investments.

(4) Wall Street invests the taxpayer’s money, funneled through the government worker pension funds, demanding a return of 7.75%. To achieve this return, they invest in hedge funds and other manipulative, highly speculative investments. This increases the volatility of the markets, crowds out small investors, and drives down returns for small investors.

To fund government worker pensions, what has happened is the government workers have taken the taxpayer’s money, and essentially lent it back to the taxpayers at a rate of 7.75% – at a time when 30 year mortgages are below 4.0%, the 10 year treasury hovers at around 2.0%, and the rate of GDP growth is at or below 3.0%, which is roughly the rate of inflation.

Taxpayers provide the seed money for pension fund investments, these investments are aggressively managed which undermines the individual retirement investments the taxpayers make for themselves, then when the pension funds ultimately fail to meet their 7.75% targets, the taxpayers are assessed to cover the losses. Triple jeopardy.

Every time another public sector union or government pension fund spokesperson claims that taxpayers do not bear the brunt of funding public sector pensions, read between the lines, and this is the rest of the story.

“CalPERS is to Wall Street what a whale is to a Vegas Casino. A high roller. A player. The biggest swinging male appendage in the room. With $235.8 billion in assets, it is the nation’s largest pension fund, and among the biggest investors in the world. And it’s largely on the expected gains in its Wall Street investments that CalPERS has been able to persuade officials in many California cities and counties that they could pay rising pension benefits to their public employees…”

“It wasn’t always this way. For decades after its 1931 founding as a pension program for state workers, CalPERS—then called the State Employees Retirement System (SERS)—made stodgy, sure-thing bond investments. That changed in 1953 when the legislature allowed SERS to invest in real estate. Thirteen years later, there was another loosening of the restraints on the agency’s investments when state voters passed a union-backed proposition allowing CalPERS to invest a quarter of its portfolio in stocks. In 1984, high on the fumes of the Reagan Revolution, labor pushed Prop. 21, allowing CalPERS to invest anything/everything in Wall Street. CalPERS had become a whale…”

“You can begin to see the confluence of forces that would generate a pension problem when you also consider that, with life-expectancy rising and retirement-age falling, California offered public workers more generous pension benefits. In 1932, that benefit was 1.4 percent per year of service; the percentage increased to 1.6 percent under Gov. Warren, and to 2 percent when Gov. Ronald Reagan took over the Governor’s Mansion in Sacramento. It’s between 2 percent and 3 percent today…”

“CalPERS has a reputation as an activist investor. The organization has insisted on quid pro quos: in exchange for investment cash, it has pushed for caps on executive pay and transparency; has led the way for human rights, environmental and labor standards in emerging markets; and participated in class-action lawsuits against major health insurance companies, including UnitedHealth Group…”

“Leveraging that tradition, the city’s workers could reform their union and its bloated pensions. They could start by demanding that CalPERS invest their pensions in solid/stolid/boring U.S. bonds rather than in the speculative junk that fueled Wall Street’s rapid, unprecedented rise through the 1990s and its post-scriptural crash in 2008. That might—might—mean more modest retirements, of course, but it would certainly end union members’ hypocritical reliance on Wall Street—their affection for gambling when Wall Street inflates their pensions, their hatred of the market when it shapes the contours of their daily work…”

You Know Who – as always, thank you for your comment. And as always with a comment like yours, I can only suggest that you identify exactly what parts of this post you found misleading. In my opinion the sentiments of the Tea Party and the sentiments of the Occupy Movement are not very far apart. I think that is especially the case when it comes to the activities of Wall Street speculators. How to regulate them in a way that preserves the free market but at the same time prevents them from manipulating the market to extract billions in profit while producing nothing of value for anyone else – that is the challenge.

In response to the editor’s request for detail, but in the interest of space, I will address only the more glaring misunderstandings in the “summary”. The rest of the piece shares these issues.

The first statement assumes that all taxes are paid to the government workers as wages. While the majority of the cost of any service industry, including government, is labor, capital and material costs should not be ignored. The 40% figure is probably close to correct even if we disregard the problems with including the non-income-based taxes and service fees.

“In addition to” in the second statement incorrectly inflates total compensation for public sector workers. Pensions are part of a government workers’ compensation just as other retirement arrangements are part of private sector pay. Comparisons of private workers to public sector workers based on raw averages create an illusion. They include untrained and low-paid private sector workers who generally don’t have counterparts in the public sector — there is no public-sector equivalent of a “Wal-Mart greeter.” To evaluate this reasonably, we must recognize that jobs in education, government policy and administration, and public safety usually require experience in addition to specialized or higher than average levels of training. Appropriate research demonstrates that public employees are paid less than private sector workers with similar duties.
The National Institute for Retirement Security (NIRS) did over fifty studies that analyze the total value of public pensions to state economies. They also did a broad study comparing total compensation of private sector workers to compensation of both state and local public employees. The studies included all pensions and benefits and assumed that all public employee benefit costs were borne by state taxpayers, even though this is almost never the case. Nationally, public employees are paid between 11% and 12% less than private sector employees with the same training and job descriptions.http://www.nirsonline.org/storage/nirs/documents/final_out_of_balance_report_april_2010.pdf

Statement 3 is essentially true and works in cases where governments have not “borrowed” from the pension plans by taking contribution holidays and then reneged on the “loans” while attempting to avoid the political heat that would come from the necessary benefits adjustments to compensate for the underfunding of the original plant. A pension plan, like any plan, only works if you follow the plan. The reference to “generous” fails to recognize that public-sector workers contribute a higher percentage of their pay to their pension funds than private sector workers and receive a higher percentage of their total compensation as pension and working conditions benefits.

Statement 4 makes two mistakes in the first six words. The pension funds invest the money not Wall Street. Pension contributions are employee compensation and are pension money not taxpayer money. Nobody can enforce any return demand on a market. Pension funds don’t speculate. Depending on their size, they use a variety of alternative investments including real estate, fixed income, and hedge funds to “hedge” against downturns in individual asset classes. Pension funds use their asset allocations to reduce overall volatility by investing in uncorrelated assets of all types including hedge funds.

Because of their large passive portfolios pension funds are almost always rebalancing so they are almost always in the market. This benefits small investors by providing liquidity to markets and thereby reducing their volatility. This is true even in the small-cap and micro-cap markets were pension funds hire more outside managers.
Organizations like The Council of Institutional Investors, largely public pension funds, has been active in the shareholder rights initiatives that have benefited all shareholders including small investors. Initiatives like “shareholder say on pay”, board composition, and “corporate ballot access” have begun a trend that encourages corporations to be run for the benefit of their shareholders, including small shareholders, rather than corporate managers. The small investor is getting a freebe here.

What drives down returns for small investors is high fees paid to money managers. The investor running his own IRA or 401(k) is paying investment fees that are between 5 and 12 times higher than an institutional investor. Over its life, the average IRA or 401(k) pays 40% of its assets in fees. Your beef is with the brokers, custodians, and money managers on this one.

In addition to” in the second statement incorrectly inflates total compensation for public sector workers. Pensions are part of a government workers’ compensation just as other retirement arrangements are part of private sector pay. Comparisons of private workers to public sector workers based on raw averages create an illusion. They include untrained and low-paid private sector workers who generally don’t have counterparts in the public sector — there is no public-sector equivalent of a “Wal-Mart greeter.”

You are parroting the public union “talking points” Bob.

Yes pensions are part of a gov employees comp, as are 40-50 days of time off through vacation sick and holiday pay. The problem is gov employees are grossly overpaid on all levels except for professionals such as doctors, lawyers and the like.

There are no jobs in the real world where GED educated employees, like cop FF and prison guard, get comped $200K before overtime, even $350K in some munis in this state.

So your claism that gov emplolyees make less are thoroughly refuted by the BLS, a gov agency, when they compare specific jobs that both sectors have. The result, 8 out of 10 jobs PAID MORE in gov.-the exception are the professons (lawyer, doctor, etc).

Plus gov employees receive a prooerty interest in their jobs, they are NOT “at will” employees, which adds at least 30% more value to the gov job.

Bob, your “talking points” won’t work here, I have data and studies that destroy your unverified, hearsay, anecdotal talking points all day long.

Bob, here is FACTUAL data, not talking points;

Government pay ahead of private industry
By Dennis Cauchon, USA TODAY

Government employees earn higher average salaries than private-sector workers in more than eight out of 10 occupations, a USA TODAY analysis of government data finds.

Once again, Rex, you’re trying to mix apples with at least pears in this case. Federal employees have a completely different compensation system than state and local employees.

There’s no reason to take your points seriously, Rex, since you don’t bother to make serious points in your posts. If you add two or three weeks of vacation for a senior employee with 12 days of holiday pay, you get a total of 22 to 27 leave days, not the vastly inflated 40-50 leave days you claim in your post.

You’ll also notice that the article you use for support makes no mention of safety service personnel. That’s because there are no comparable jobs in the private sector for police officers, fire fighters, or even real prison guards.

Do yourself and the rest of us a favor and at least try to use relevant information in your increasingly far-fetched arguments against public employees. That way we could have a little bit of respect for you and your thought processes, something that is impossible now.

Bob Stein – Thank you for your thoughtful comment. Let me respond to your summary of what you perceive to be glaring misunderstandings in this post.

ORIGINAL POST: (1) The government workers provide services vital to the taxpayer, and charge the taxpayer, on average, about 40% of their income (middle class worker, all taxes – state, federal, social security, medicare, property, sales) to receive these services.

YOUR COMMENT: The first statement assumes that all taxes are paid to the government workers as wages. While the majority of the cost of any service industry, including government, is labor, capital and material costs should not be ignored. The 40% figure is probably close to correct even if we disregard the problems with including the non-income-based taxes and service fees.

ORIGINAL POST: (2) The government workers receive, in addition to their normal pay, funded by these taxes, pensions that are, on average, five times better than what taxpayers get from social security (the average government pension is $60K per year with an average retirement age of 55, the average social security benefit is $15K per year with an average retirement age of 65).

YOUR COMMENT: “In addition to” in the second statement incorrectly inflates total compensation for public sector workers. Pensions are part of a government workers’ compensation just as other retirement arrangements are part of private sector pay. Comparisons of private workers to public sector workers based on raw averages create an illusion. They include untrained and low-paid private sector workers who generally don’t have counterparts in the public sector — there is no public-sector equivalent of a “Wal-Mart greeter.” To evaluate this reasonably, we must recognize that jobs in education, government policy and administration, and public safety usually require experience in addition to specialized or higher than average levels of training. Appropriate research demonstrates that public employees are paid less than private sector workers with similar duties.
The National Institute for Retirement Security (NIRS) did over fifty studies that analyze the total value of public pensions to state economies. They also did a broad study comparing total compensation of private sector workers to compensation of both state and local public employees. The studies included all pensions and benefits and assumed that all public employee benefit costs were borne by state taxpayers, even though this is almost never the case. Nationally, public employees are paid between 11% and 12% less than private sector employees with the same training and job descriptions.http://www.nirsonline.org/storage/nirs/documents/final_out_of_balance_report_april_2010.pdf

EDITOR’S RESPONSE: I’m not sure what you’re getting at with your first point. The analysis assumes the reader knows what “total compensation” refers to, i.e., the value of all current pay, current benefits, and current period funding of future (retirement) benefits. We would agree on this, and in fact, it is a key point those of us concerned about public sector compensation have to continuously reiterate. Benefits in the private sector (current and retirement) are significantly lower than in the public sector. Equally troubling, the cost of current year funding for future benefits is grossly underestimated in the public sector. Insufficient funds are set aside for pensions due to over-estimates of long-term investment returns, and NO funds are typically set aside for retirement health benefits. When you normalize for these factors, as well as for the significant disparity in paid time off that favors public sector workers, you gain an apples-to-apples comparison where public sector total compensation is far higher than is generally reported. Your second point about compensation is highly debatable. Yes, public sector workers, on average, have higher educational attainment. But most studies done by NIRS or similar organizations don’t take into account the market value of degrees; they value a doctorate in sociology as highly as one in computer science or chemical engineering, for example, which skews results. There are also jobs in the public sector that have no counterparts in the private sector, rendering comparisons extremely subjective. Finally, NIRS is an organization funded and essentially controlled by unions and pension funds. It is hardly an objective source of data. For much more on this, refer to this analysis that picks apart a similar study that tries to claim public sector employees actually make less in total compensation than private sector employees:http://civfi.com/2010/10/24/public-employee-compensation/

ORIGINAL POST: (3) The government workers tell the taxpayers – don’t worry – you don’t have to pay additional taxes for us to get these generous pensions, because we’ll invest the money on Wall Street, and Wall Street will earn 7.75% per year on these investments.

YOUR COMMENT: Statement 3 is essentially true and works in cases where governments have not “borrowed” from the pension plans by taking contribution holidays and then reneged on the “loans” while attempting to avoid the political heat that would come from the necessary benefits adjustments to compensate for the underfunding of the original plant. A pension plan, like any plan, only works if you follow the plan. The reference to “generous” fails to recognize that public-sector workers contribute a higher percentage of their pay to their pension funds than private sector workers and receive a higher percentage of their total compensation as pension and working conditions benefits.

EDITOR’S RESPONSE: Here you completely miss the point. Yes, of course there were cases of state and local governments who didn’t make their pension payments. But that is not the primary reason these pension funds are in trouble. The primary reason is because they cannot earn 7.75%. For every percent a pension fund has to lower projected rate of return, the withholding (as a percent of payroll) for the pension fund contribution has to go up by 10%. Your comment that “public sector workers contribute a higher percentage of their pay to their pension funds than private sector workers” is specious because even if they have 6.25% withheld – government employers frequently pay the employee share – this is far less than even 50% of what is required to be contributed. For example, someone getting a pension equivalent to 60% of their final salary, at a rate of return of 7.75% (after inflation, 4.75%; CalPERS official long-term rate used for projections), who works 30 years and is retired 25 years will have to contribute 18.5% of their pay to fund their pension. At a 90% pension, which is common, they would have to contribute 27.7% of their pay. If you lower the rate of return projection by just two percentage points, to 5.75% per year – which I think is still too high – you have to contribute 31.8% and 47.7%, respectively. No public sector employees are contributing even half of what they need to contribute – the employer, i.e., the taxpayers, are covering far, far more than the 6.25% that employers in the private sector have to contribute to social security, by multiples of anywhere between 3x and 10x, depending on what rate of return you assume these pension funds can really earn. For much more on why public sector pension funds can’t hope to maintain a 7.75% rate of return, refer to the following recent post:http://civfi.com/2011/11/29/merge-social-security-and-public-sector-pension-funds/

ORIGINAL POST: (4) Wall Street invests the taxpayer’s money, funneled through the government worker pension funds, demanding a return of 7.75%. To achieve this return, they invest in hedge funds and other manipulative, highly speculative investments. This increases the volatility of the markets, crowds out small investors, and drives down returns for small investors.

YOUR COMMENT: Statement 4 makes two mistakes in the first six words. The pension funds invest the money not Wall Street. Pension contributions are employee compensation and are pension money not taxpayer money. Nobody can enforce any return demand on a market. Pension funds don’t speculate. Depending on their size, they use a variety of alternative investments including real estate, fixed income, and hedge funds to “hedge” against downturns in individual asset classes. Pension funds use their asset allocations to reduce overall volatility by investing in uncorrelated assets of all types including hedge funds.

EDITOR’S RESPONSE: We may just have to disagree here. The money that pays public employees is taxpayer’s money. The taxpayer is the ultimate employer. If an employer puts money into a pension plan for an employee, it is the employer’s money. Of course this money is part of the negotiated compensation for the employee, but it is the employer who is spending the money. And you are right when you say “Nobody can enforce any return demand on a market,” but you ignore one case where they can – when there is the taxpayer who has to step up and make up, through higher pension fund contributions paid for by the government employer – funded by higher taxes – any losses incurred when the pension funds fail to meet their 7.75% targets. As for your suggestion that pension funds don’t speculate, how else do you think they beat the market? As documented here: http://civfi.com/2011/08/13/calpers-projected-returns-vs-reality/, the stock market has not even kept up with inflation, let alone logged 4.75% after-inflation returns for the past 11.5 years. Where did the 7.75% returns come from? Real Estate? Oops. Of course pension funds speculate – because if they didn’t they would be an index fund and their asset values would be even more battered than they already are. But here’s a final very important point: While the market is a win-win proposition whenever the overall assets represented by publicly traded equities go up in value, how those gains are allocated is a zero-sum game. If the big pension funds use techniques not available to the small investors, whether they are manipulative program trading and short selling on margin, or just sophisticated hedges against downside moves, if they beat the market, someone else loses. You cannot beat the market without someone else losing. It is mathematically impossible. For a public employee pension fund to beat the market they necessarily have a parasitic impact on other investors.

You go on to make other points that have to be challenged. You claim that large passive portfolios that are “always rebalancing” create liquidity. The opposite is the case. These high frequency “rebalancing” tactics are taking liquidity out of the market and increasing volatility.

You suggest that organizations such as the Council of Institutional Investors getting involved in shareholder rights initiatives is a good thing for all investors. I would disagree. This meddling in corporate governance by union dominated public pension funds – they now force companies to give them board seats with as little as 3% ownership – is driving corporations offshore, it is inducing companies to restructure back into private enterprises, and it is preventing companies from exercising optimal business practices to maximize profits. The irony is stunning. Labor union influenced public sector pension funds cannot possibly achieve the projected 7.75% annual fund growth, but their actions to undermine the ability of corporations to govern themselves is hurting corporate profits. The relationship between corporate profits and pension fund growth is 1-to-1.

Finally, you repeat one of the latest shibboleths to be broadcast by the PR firms representing unions and pension funds, that “investment fees” are now consuming most of the growth that would otherwise accrue to individual 401Ks. Are you kidding? Have you thought about this? I can purchase a stock on e-trade for a flat fee of a few dollars. As a value investor, I can hang onto that stock for decades. Where is the fee? Does anyone actually believe this? The “beef” that anyone may have with Wall Street should be especially with the public sector unions and the public sector pension funds. They are the biggest players on Wall Street. They pour hundreds of billions of taxpayers dollars through Wall Street brokerages, engaging in market-beating manipulative tactics (their very solvency depends on this), and it kills the market for small investors. They are money managers. They are Wall Street. Wall Street stopped being a street in lower Manhattan a long time ago. It is a virtual entity today, with beachheads in every city. In California we have CalPERS and CalSTRS, masters of the universe, sucking tens of billions of dollars out of the Californian economy every year and pouring it into investments that can’t hope to return 7.75% without market manipulation. It is a wonder the Occupy Movement hasn’t sent their minions to the lobbies of the public sector pension funds. Could it be because the Occupy Movement is being stage-managed and supported by the same public sector unions who – through the deals they “negotiated” with the politicians they elected – are funding Wall Street’s biggest, most impenetrable incarnation, the public employee pensions?